Kevin Daly: Late retirement has transformed the labour market as older people work longer to make ends meet

One symptom of this transformation has been the resilience of employment, which held up relatively well while the economy was weak and is now rising sharply as it recovers.

In the past year, total employment has risen by 2.4 per cent – three times its long-run average.

Working: The record-high rates of employment among older workers reflect a generational shift towards later retirement

The employment rate among those aged 16 years and older is now approaching pre-crisis levels and, for the first time on record, is higher than the equivalent US measure.

However, this relatively robust performance masks a marked divergence between older and younger workers.

While the employment rate among those aged 50 and above sets a new record almost every month, the figures for those aged 21 to 49 – what used to be described as ‘prime working age’ – remains depressingly weak.

The record-high rates of employment among older workers reflect a generational shift towards later retirement.

While the average working life in Britain has been rising for some time, the trend towards later retirement has accelerated in recent years.

This has happened due to a combination of choice and necessity.

First, the increase in the state pension age for women from April 2010 onwards has – unsurprisingly – led to later retirement among women.

More surprisingly, however, it has also led a large share of men to postpone their retirement.

Many men, it seems, do not want to retire while their partners are still working.

Second, the phasing out of the compulsory retirement age for men and women in 2011 has led to many older workers electing to stay on.

Third, the additional increases in the state pension age for men and women that are scheduled from 2018 onwards have acted as a disincentive against early retirement.

This is because, even though the changes will not affect pension payments for some years, the reduction in future state pension eligibility makes early retirement less affordable.

Fourth, the low level of annuity rates on pensions – which reflect the low level of long-term interest rates globally – has provided a strong incentive for older workers to postpone retirement.

(However, the decision in the Budget to scrap compulsory annuities for retirees could help to offset this effect.)

In addition to accounting for much of the strength of employment, the extension of average working lives accounts for many other features of Britain’s recent labour market performance.

For instance, because relatively large shares of older workers tend to be self-employed, the rise in participation among older age groups also accounts for much of the recent increase in the share of self-employment within overall employment.

And, because the strength of overall employment has masked a marked divergence between high employment rates among older workers and relatively low rates among the young and middle-aged, it also helps to explain why wage growth for many workers has remained weak (even as overall employment has been strong).

While employment held up well during the crisis and has grown strongly since, underlying pay growth has risen at an average annual rate of just 1.6 per cent in the five years since the crisis, and by 1.2 per cent in the past two years.

Given the high levels of inflation through much of this period, real pay has fallen significantly.

Looking forward, the good news is that, as the recovery matures, employment and wage growth are likely to begin to rise in tandem.

There is evidence from recent wage indicators that the labour market may be reaching such a turning point.

Average earnings growth is likely to decline in the next couple of months, owing to distortions related to last year’s reduction in the top rate of income tax.

But, on an underlying basis, private-sector wage surveys – which have historically contained valuable information about future official earnings data – suggest that underlying pay growth is likely to rise over the coming 12 months.